Conditions Leading to the Omission of Testing of Control Procedures - Essay Example

Auditing and Assurance Name Institution Auditing and Assurance Introduction Account receivables denote amounts of money owed to a firm by its customers (Wallace, 1993). These amounts are owed after either goods are delivered to these entities or services are rendered. The firm being owed these amounts typically generates an invoice which is sent to the customers through mail or electronically (Wallace, 1993). Auditing tries to form and reinforce trust in any financial information system. Wallace recommended the three hypotheses that enlighten the function of auditing in controlled and open markets. This assignment will help to describe the roles these three hypotheses play in a business environment. The discussions in this case study will try to highlight the relationship between the underlying theory and contemporary practice of auditing. Quality of Oral Evidence The finance department forms the core of any organization whether profit oriented or not (Laffont, 2002). It is therefore very important for all the employees in any organization to have the general picture of the organization at any given moment (Antle, 2005). This also puts a greater burden to the management team to have a more accurate picture of the organization at any given moment being that they lie with the decision making arm of the organization. An effective manager will have accurate information at any time, whether he/she has been called for a prior scheduled interview where the questions to be discussed had earlier been issued or an impromptu one (Laffont, 2002). Form the extract of the interview between Mitchell and Mr. Miller, there is a varied opinion on how Mr. Miller responds to these questions and how Mitchell designed the questions. Mr. Rodgers, president of the company expressed a desire to have the proper mechanisms in place. This however was not properly expressed in the interview. The decision to start by studying the internal control mechanisms of the company was a wise one. This made it easier for Mitchell to easily interpret the level of truthfulness of the interview. The interview tried to cover a wide area. It also exposed some of the areas that need improvement. The ageing of accounts however needs to be done more often. The manager needs to do more to get in touch with all the relevant departments. This is shown by the fact that there are questions which were left unanswered due to the fact that someone else was better placed to answer then. An example is when he was asked how often Rodgers approves a sale to customers whose accounts become overdue, he replied that he did not know. By the virtue that he holds the position of assistant president, he was supposed to know this. The interview was well spread as it covers such areas as ageing of accounts, the payment of sales representative and the processes involved in giving discounts. It is my view that she achieved much form the interview which would give a broader picture of this assignment. As depicted in the interview, this type of evidence should not be relied on in total as figures should be used to support the arguments. It has also been seen the assistant manager is not in touch with all the decision making procedures of the company hence further analysis is needed to support the interview results. Recording of Fictitious Sales This type of fraud involves the recording of sales that never occurred. Depending on the type of fraud, fictitious sales can involve recording of sales made to customers who do not exist but at times it may also involve genuine customers who form the data base of the company (Wallace, 1980). An example for this is when a fictitious invoice is prepared but it is not mailed. This invoice will bear the name of a genuine customer although no services will be rendered to the customer or goods delivered. During the next accounting period, such a sale may be reversed to conceal the fraud. If this is done, there will be a shortfall in this accounting period hence creating the need for more fictitious sales. Another form of this type of fraud is to use invoices for legitimate customers where the goods sold or services rendered will be inflated to depict a higher amount of goods sold (Wallace, 1980). These two types of fraud are most common where accounts receivables are involved. In effect, according to the Securities and Exchange Commission, realizable revenue should only be earned when; genuine evidence of all arrangements exists, collectability is reasonably assured, the set price to the buyer is determined and fixed and services have been rendered or delivery of goods occurred. If the above procedure is followed, then it will be very hard for those interested in perpetrating this kind of fraud to continue doing it. Revenue may be realized in some circumstances where delivery has not occurred. The company should set out strict criteria that limit the ability to record such transactions as revenue (Brown, 2005). Fictitious sales may also arise from sales made with conditions and terms that have not been fulfilled. In this type of sale, the rights of ownership and risk will no have been passed over to the customer. Such types of sales do not qualify for recording as revenue. Financial statement fraud entails the recording of financial transactions during incorrect periods. . Another type of fraud is where the seller’s price to the buyer is not determined. This type of fraud is most common and the sales agents may be considered as the main culprits. The main reason why this type of fraud is done is to quietly buy time in order to fix some other types of fraud that may be lying undetected. This fraud may also be done in order to help a business obtain funding or financing that may not be obtained if the honest financial statements are used.  Regardless of all the type of frauds discussed, management and auditors should be ready to discuss and put in place measures that would help note these different kinds of fraud before they take a toll on the business financial statements (Brown, 2005). This was the main goal of the company’s president when he said he would wish for the systems to improve as the organization grew. Information Provided Mr. Miller failed to provide information on the people he works with in his department and their specific roles. This would have helped the auditor know to what extent the assistant company manager would be knowledgeable on the company’s operations. However, it should be noted as earlier mentioned that the scope of this interview was very wide as it covers most of the areas that were of help to the auditor. The auditor’s specific interest was on the account receivables. Mr. Miller started by confirming that everyone has access to the accounts receivable subsidiary ledger. This was of great help to the auditor as it clearly shows that’s for anyone to access the customer data base for the company and get the required information in order to facilitate a fraud is easy. Information on ageing to the auditor is very important as it will help in realizing some of the shortfalls that may arise from this annual ageing of accounts. Another important piece of information is that the subsidiary ledgers are only examined ones a year by an external auditor is important. Such practices are what enable those who intent to commit a fraud to it with a specific time frame where they know it will be very hard for the company to notice. Information that the treasurer’s office opens all mail is important. This shows how it is easy for one to access a complaint letter from a customer who received a wrong invoice. Information on the payment of sales agents is important. This will help the auditor relate the payments made in a specific period of time to the revenue received. It will also help point out the sales agents whose client behaves in a suspicious manner as potentials agents of fraud in the company. Accounts receivable have risen to 53 days. This piece of information will useful to the auditor as reasons as to why the accounts receivable have risen will be sought. The response to this will be wide as a lot of factors will contribute to it which means more avenues for fraud could be unearthed. The interview has helped to give an insight into the procedures followed to help sort out issues related to account receivables. From the interview, it can be said the information gathered would be of great help to the auditor though some of the information held back could be of critical value if discovered from the books off accounts. Conditions leading to the omission of Testing of control Procedures When audit documentation demonstrates that a perfect job was done, this might lead to auditors omitting the testing of control procedures. This means that there would be no reasons backing the testing of control procedures. This is the main reason why many firms would avoid doing such an undertaking. However, this should not be taken as a sign to show that things are ok. Documentation can be perfect but still there can be employees who have perfected in the art of fraud that may never show up in such a system. Another reason that may lead to such a decision may be when a company feels that the internal audit process is working up to the expected standard. This means that all the mechanisms put in place to perform checks and balances are working. A company should not waste resources if it feels such a system is working. Mr. Miller indicated this when he said no subsequent queries are made on audit reports. He also showed that he believed his sales representatives are excellent and they are continuously making new group customers. When there is such belief and trust in a system, a company may choose to avoid making frequent control test procedures. When all the books of accounts are properly done, it will be easier for auditors to do their job, hence negating the testing of internal control procedures. Another reason why auditors may choose to do this is when proper information on the flow activities is given to them by management. There would be no reason for them to do this as sufficient information would be given for them to start their job and pinpoint any anomaly. Risk Planned detection risk is affected by the excellence of auditor. The lower the quality of the auditor the higher the level of detection risk (Antle, 2005). Detection risk can also be high in areas where regulatory bodies can be said to be ineffective. This being one of the factors that comprise an audit risk, it is important to relate it to the other factors. When one is trying to determine the levels of inherent risk, an auditor has to ignore the fact that a client has internal controls in place (Antle, 2005). An auditor will only consider the strength of the internal controls when assessing the client’s control risk. When evaluating inherent risk, you appraise how predisposed the financial statements are to material misstatement in relation to the client’s business. A few factors can increase inherent risk, these include; availability of financing, state of the economy, expiring patents, prior misstatements and susceptibility to fraud It is the main responsibility of the management and everyone charged with governance and decision making to implement internal control system and maintain it appropriately which includes managing control risk. Control risk can be effectively controlled with proper internal control mechanisms (Antle, 2005). While detection risk cannot be easily detected, it is the duty of management to try its level best and get auditors who are competent enough to do the job. Summary From the above assignment and the interview studied, it can be seen that the management is not serious with the issue of account average age rising to 53. The same can be said when Mr. Miller is asked on how they arrived at how Lakeside arrived at 0.7% as the figure for calculating the uncollectible accounts at the end of every year. Such an attitude would raise suspicion as it should lie with management on how decisions are reached. Mr. Miller ought to give more than he did in the interview to the auditor in order for problems within the Company to be realized in time. Conclusion Audits give a clear picture of where the company is in relation to where the management expects it to be in terms of operations. Company should try its level best try find suitable and qualified auditors who will help realize this dream. Risk is an important aspect of auditing and it should be put into consideration at all times. Management should also try its level best to understand what goes on in all the departments of the firm. References Wallage, P. (1993). “Internationalizing Audit: A study of Audit Approaches in the Netherlands”. European Accounting Review. 3: 555-578. Watts, R. (1983). Agency Problems, Auditing and the Theory of the Firm. New York: Jossey-Bass. Antle, R. (2005). The Auditor as an Economic Agent. New Jersey: Macmillan M H Bazerman, M. (2002). “Why Good Accountants do bad Audits”. Harvard Business Review, 80(11): 96-103. Brown, R. (2005). A History of Accounting and Accountants. London: Edinburgh Wallace, W. (1980). The Economic Role of the Audit in Free and Regulated Markets. New York: University of Rochester. Laffont, J. (2002). The Theory of Incentives: The Principal-agent Model. Princeton: Princeton University Press. Gunther, J, & Moore, R. (2002). “Auditing the Auditors: Oversight or Overkill?” Economic and Financial Policy Review. 1(5). Clark, R.C. (1997). A Statement of Basic Auditing Concepts. New York: Jossey-Bass.   Read More